International Taxation
Is Government Pension of Indians Taxable in USA ?
The idea of an article on “taxation of pension of Indians in USA” this post came from a retired Lt.Colonel who now lives in USA . He asked if the Diability Pension received by him , which he declares in the tax return filed in USA , is actually taxable in USA . So, this post is exclusively focused on taxation of government pension received by an Indian who is residing in USA “.
Government Pension?
There is an exclusive article of Double taxation Avoidance Agreement (DTAA) that deals with the taxation of “Government Pension” . The term used in the DTA covers following types of pensions as “government pension”
- Paid directly by the Government of India;
- For services rendered to the Indian government – this includes central government, state governments, and local authorities.
Taxation of Government Pension : Article 19 (2) of DTAA
The crucial tax treaty provision that could save thousands of dollars for Indian government pensioners living in USA is Article 19(2) of DTAA states: as under :
“Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that state or subdivision or authority shall be taxable only in that State.”
2. (a) Any pension paid by, or out of funds created by, a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State.
(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.
This means that by virtue of 19(2)(a) of DTA , pensions paid by the Government of India are generally taxable ONLY in India, not in the United States. But , Clause 2(b) creates an exception to that rule.
The Exception to Rule of Taxation of Pension of Indians in USA
The Article 19(2)(b) creates a crucial exception that the pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.”
It means If you are BOTH a US resident AND a US citizen/national, then the USA has the exclusive right to tax your Indian government pension, and India cannot tax it. Important to note the word “and ” after “a resident of” in the Article 19(2)(b) which means both the conditions – tax resident of USA and a USA citizen/national , must be satisfied for taxation of government of India pension in USA. For example :
- if Mr X is not a tax resident of USA , but a citizen of USA , even though the global income is taxable in USA by virtue of rules for US citizen, but the Article 19(2)(b) is not satisfied , so India maybe taxing the said government pension .
- Second example is a case a person from India drawing govt pension remain in USA for more than 182 days or satisfies all the tax residence conditions , but he is not a citizen of USA , in that case again Article 19(2) (b) shall not be satisfied .
It should also be noted that the saving clause of Article 1(4)(b) specifically excludes Article 19 from the “saving clause” for individuals who are “neither citizens of, nor have immigrant status in” the United States. This means that if you are:
- An Indian citizen living in the US as a non-immigrant; OR
- A green card holder who has not become a US citizen; OR
- Any other status where you’re not a US citizen
Then Article 19’s protection applies, and your Indian government pension should only be taxable in India. If the said pension was tax free in India by virtue of any law, circular or notification , it will not make them taxable in USA .
